HR challenges

Understanding Employment Classification and Avoiding Penalties

February 04, 2021

Most workers are either employees or independent contractors, and which category a person belongs to has profound implications for every part of their work, and severe consequences for employers who get the distinction wrong. 

The reason the penalties for worker misclassification can be so severe owes a lot to how different the two classes are. 

What are independent contractors? 

Independent contractors have considerable power over the circumstances of their work; they can, in theory at least, negotiate as equals with the employer, setting their own hours, their compensation rates, and other fundamental conditions. Employers might have some responsibilities for verifying that contractors are appropriately trained in occupational health and safety awareness or violence and harassment prevention, but that’s about it.

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Who would be considered an employee? 

Employees, conversely, are subject much more to the decisions of their employers. Consequently, legislation provides a great deal of protection to employees, requiring employers to meet certain minimum conditions for things like pay, hours of work, overtime, breaks, vacation, protected leaves, and so on—conditions employers have no responsibility for when using independent contractors. What this means for employers is that if a court finds a ‘contractor’ was actually an employee all along, the employer might have to make up for all the employment entitlements they had previously not provided the misclassified worker, which can quickly grow expensive, especially if the misclassification is widespread.
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Should employers just never use contractors
in order to avoid the risk? 

That’s a bit extreme, and contractors are often the right employment model for particular circumstances. For one example, an employer might have a project that requires a highly specialized skill that none of their employees possess and that would be difficult to train for, but that they also likely won’t need again once the project wraps. Bringing in a specialist as a contractor makes sense here. Contractors are helpful in a variety of circumstances—you just have to get the details right.

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How can I avoid a misclassification?  

To help you out, we’ve outlined steps you can take to understand when a worker is a contractor and when they’re really an employee, and how you can keep the two categories distinct. Download our FREE Getting to Know Your Employee Types Guide for more information.

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